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Negotiable Instrument Act

A Negotiable instrument gives its holder the right to receive a certain amount of money. This money passes from one person to another by transmission or endorsement. By virtue of this move, the new owner therefore acquires the right to pass the money over to someone else. For that reason, the trade in negotiable instruments is very important.

Objective
  • The primary reason for negotiable instruments is to lower the chance of having to carry large currency sums and to lower the probability of fraud or robbery.
  • To implement negotiable instruments, there must be statute, the name of which is The Negotiable Instruments Act, 1881.

In 1881, the Negotiable instruments act came into effect in India. Before its passage, its implementation, the English Negotiable Instrument Act was effective in India. It applies to the whole of India except in Jammu and Kashmir.

Negotiable documents include transactions, used in commercial deals and monetary dealings. The term 'negotiable' refers to an enforceable right, and the term 'instrument' means any document, whether enforceable or not, that confers a right on anyone. Thus, it is a negotiable device under the terms of the Negotiable Instruments Act, 1881.

A negotiable instrument under section 13 of the Negotiable Instruments Act means a cheque or bill payable either to request or on demand.

Characteristics of a Negotiable Instrument

Information on Ownership
  • Documents which fall under the statue like, Promissory notes, bills of exchange, and cheques under the Negotiable Instruments Act, 1881
  • Used in the following ways: bank notes, stock warrants, stock warrants, script bills, bearer shares, script stocks, and debenture stock
  • An instrument is ‘negotiable’ with the following features: - If it is freely transferable by way of, ‘delivery’ or “by endorsement and delivery”

Presumption

  • Any negotiable instrument assumes as has a sign and approval.
  • A negotiable instrument must have the date of manufacture or drawing recorded.
  • Both of the bills needs approval within the terms and in the date shown on the document.
  • Transfer it until it expires.

Endorsement

When a maker or holder puts his name and signature on the instrument on the front or back for that purpose creates Endorsement. The creator is Endorser and the receiver is Endorsee.

Promissory Note

The promissory note appears in section 1881 of the Negotiable Instruments Act as writing (not being a banknote or currency note) which promises to pay a sum of money to a certain individual or the bearer, from maker the amount.

A promissory note is a written pledge from someone to give a certain amount of money to a certain party. The person who guarantees and promises to pay is the “maker". To whom it is made is a “payee.”

  • The term 'promissory note' is self-explanatory, since it describes just what it means.
  • If you promise to do something in writing, you must be able to do so. Writing can be in print or on a typewriter.
  • It must be accompanied by an obligation or an agreement to pay. And mere acknowledgment is not enough. Promissory notes do not have to use the phrase 'promise.'
  • An instrument payable on the occurrence or non-making of an act is not a promise.
  • The Promissory Note must have signature of the maker for it to be effective.
  • To make a notice promissory, the instrument must provide specific information about the manufacturer and the payee.
  • The amount that you are liable to pay must be definite. Just a pledge to pay may be a promissory note.
  • The promissory note may contain a date, number, place etc but it is not necessary in law. When the note doesn't have a date, it is considered accepted as if given on the day.
  • May be done in Installments.
  • It is payable on demand or after some time." A note becomes invalid three years after the day it is made.
  • It cannot be issued as money or sent to anyone on demand because it does not have a predetermined life span of validity, and if it is, it does not keep being renewed.
  • Must stamp either before signature is done or at the time of its execution to be legally binding. Promissory notes, which do not bear it, are worth almost nothing.

Bill of Exchange

According to Sec.5 of the Act, a bill of exchange is any document that orders a certain party to pay a sum of money only or to the bearer of the bill in writing. The bill is known as a “Draft”.

The maker is known as a “drawer” the person who needs to pay is “drawer”.

The person whose name it contains is the “payee” for whom the order is made.

Common features in a bill of Exchange:

  • There must be a written contract.
  • An order to pay or order.
  • It must be absolute.
  • It requires two or more parties: The drawer, such as yourself, and the person to which you make payments.
  • Both the parties involve must agree.
  • It must be in writing. The drawer is a witness.
  • The sum owed must be certain or definable.
  • Money must be in demand and to receive.
  • According to the provisions of the Indian Stamp Act it needs fully mark.
  • No number, date, month, or day of the week is essential.